7 Ocak 2013 Pazartesi

NASDAQ Stock Market and National Association of Securities Dealers

NASDAQ is an American stock exchange which is the largest electronic screen-based equity securities trading market in the United States. With approximately 3,200 companies (out of this, 335 are non-U.S. companies from 35 countries representing all industry sectors[1]), it has more trading volume per day than any other stock exchange in the world.[2] There is also a physical presence of NASDAQ stock market which is called as NASDAQ MarketSite. It is located in Times Square in New York City occupying the North West corner of the bottom of the Condé Nast Building. The exterior wall of the seven story cylindrical tower is an LED electronic video display that provides market quotes, financial news and advertisements.[3]

In order to understand the importance of NASDAQ in the US, we can focus on the facts about the company as follows:[4]
  • NASDAQ offers exemplary regulation, employing sophisticated surveillance systems and regulatory specialists to protect investors and provide a fair and competitive trading environment.
  • NASDAQ has the world’s highest listing standards. The NASDAQ Global Select MarketSM has financial and corporate governance listing standards that are more stringent than any exchange in the world. NASDAQ itself adheres to these most stringent standards setting an example of best-in-class governance.
  • As of 2007 November end, NASDAQ has been the market of choice for 142 IPOs, representing 65% of all IPOs listing on U.S. markets so far in 2007. NASDAQ’s 142 IPOs had raised a combined $18.9 billion.
  • In addition, 24 international companies chose NASDAQ for their public offerings raising more than $3.6 billion.
The National Association of Securities Dealers (NASD) (it will be explained in the later pages) maintains and publishes two composite indexes and six subindexes daily:[5]
  • NASDAQ Composite Index
  • NASDAQ/NMS Composite Index
  • NASDAQ Bank Index
  • NASDAQ Insurance Index
  • NASDAQ Other Finance Index
  • NASDAQ Transpotation Index
  • NASDAQ Utilities Index
  • NASDAQ Industrial Index

The most famous index of NASDAQ is NASDAQ composite index. The record of NASDAQ composite was broken in year 2000 by exceeding an index figure of 5000. NASDAQ system consists of two areas: the National Market System and the OTC market. The National Market System (NMS) comprises so-called Tier 1 OTC stocks, a select part of the OTC market whose issues meet higher volume and price requirements than the remainder of the OTC market.[6]

NASDAQ is operating under three main stages. These are pre-market, market and post-market. In pre-market; the transactions are done within 07:00 – 09:30, in market the transactions are being done within 09:30 – 17:00 and in post-market within 16:00 - 20:00.[7]

When we want to discuss the pricing system in NASDAQ; we can say that NASDAQ has a maker taker pricing system that offers lower liquidity removal fees and more favorable added-liquidity rebates based on how much trading volume the market participant executes on the NASDAQ system.[8]

After giving this information about this stock exchange we can start to talk about the OTC transactions which are being done in this market. As we know, over the counter markets are the markets that has no central mechanism or facility for trading. OTC markets are composed of dealers who are ready to buy and sell assets with anyone who chooses to trade.[9] The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.

It can be said that what is the relation between NASDAQ and OTC trading? As we know NASD was registered in 1938 as a national securities association under Section 15A of the Securities Exchange Act of 1934 and regulates broker-dealers that operate in the over-the-counter (OTC) market. This organization formed NASDAQ in 1971.

If we turn back to our subject, OTC; we know that many equity securities, corporate bonds, government securities, and certain derivative products are traded in the OTC market. Although NASDAQ operates as a dealer network and one of the main important features of OTC transaction is “being traded in a dealer network”, some people say that NASDAQ stocks are generally not classified as OTC because the NASDAQ is considered a stock exchange.

However, most of the people thinks that this is the biggest and most formal OTC market. In addition to Nasdaq, The OTC Bulletin Board and the Pink Sheets, for example, operate within the OTC market.[10] But, the rules of over-the-counter stock trading are written and enforced largely by the National Association of Securities Dealers (NASD). Prices of over-the-counter stocks are published in daily newspapers, with the National Market System stocks listed separately from the rest of the over-the-counter market.[11]

Forth Market


Forth markets are also called as forward markets. The forward market is generally an over-the-counter financial market in contracts for future delivery, so called forward contracts. Forward contracts are personalized between parties. The forward market is a general term used to describe the informal market by which these contracts are entered into. Standardized forward contracts are called futures contracts and traded on a futures exchange.[12]

When we define all transaction happenend in the future as forward market transactions, we can say that in a forward market, mainly derivatives are being traded and these markets can be classified as OTC or regulated markets. There are three types of derivatives which are being traded in the forward markets:[13]
  • Forward contracts: A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged.[14]
  • Future contracts: A future contract is a standardized contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price (the futures price) determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.[15]
  • Options: An option is a contract written by a seller that conveys to the buyer the right — but not the obligation — to buy (in the case of a call option) or to sell (in the case of a put option) a particular asset, such as a piece of property or shares of stock or some other underlying security such as among others, a futures contract. In return for granting the option, the seller collects a payment (the premium) from the buyer.[16]

The main differences in these derivatives are as follows:

Table 1. The Comparison of the Derivatives Traded in Forward Markets

Main Features
Forward
Future
Option
Mitigating risk
Yes
Yes
Yes
Standardization
No
Yes
Yes
The place of transaction
OTC
Stock Exchange
OTC and Stock Exchange
Physical delivery
Yes
Usually No
If the right is used Yes
Collateral compulsory?
No
Yes
For the seller Yes
Cash flow until maturity?
No
Yes
For the seller Yes
Credit Risk?
Yes
No
No
Leverage Effect
No
Yes
Yes

(Source: The Association of Capital Market Intermediary Institutions of Turkey, “Menkul Kıymetler ve Diğer Sermaye Piyasası Araçları”, Istanbul, 2006, p. 47.)

An example about the forward transactions will give us the basic working principle of this market.
Example

Forward transaction type: TL/ USD Future currency transaction
Initial collateral: 150 TL
Minimum collateral: 150 x 0.75 = 112,5 TL
Maturity of the contract: 29 September 2006
Amount of contract: 1.000 USD
Price of the contract: 1.4515

Table 2. Future Contract Example

Date
End of day price
Profit / Loss
Collateral
Call margin[17]
11-Sept-06
1.4520
0.5
150.5
-
12-Sept-06
1.4715
19.5
170
-
13-Sept-06
1.4822
10.7
180.7
-
14-Sept-06
1.4610
-21.2
159.5
-
15-Sept-06
1.4590
-2
157.5
-
18-Sept-06
1.4430
-16
141.5
-
19-Sept-06
1.4320
-11
130.5
-
20-Sept-06
1.4225
-9.5
121
-
21-Sept-06
1.4110
-11.5
109.5
40.5
22-Sept-06
1.4220
11
161
-
25-Sept-06
1.4370
15
176
-
26-Sept-06
1.4380
1
177
-
27-Sept-06
1.4490
11
188
-
28-Sept-06
1.4550
6
194
-
29-Sept-06
1.4610
6
200
-



[2] Wikipedia, “Nasdaq”,  http://en.wikipedia.org/wiki/NASDAQ
[3] Nasdaq, “About MarketSite”,  http://www.nasdaq.com/reference/marketsite_about.stm
[4] Nasdaq, NASDAQFact Sheet 2007, US, 2008, p.1.
[7] Wikinvest, “List of Stock Exchanges”,  http://www.wikinvest.com/wiki/List_of_Stock_Exchanges
[8] Wikipedia, “Nasdaq”,  http://en.wikipedia.org/wiki/NASDAQ
[9] Tim S.Campbell, Financial Institutions, Markets and Economic Activity, US, Mc Graw Hill, 1982, p.226.
[10] SEC, “Over The Counter Markets”,  http://www.sec.gov/divisions/marketreg/mrotc.shtml
[11] Answers.com, “Over The Counter”,  http://www.answers.com/topic/over-the-counter-substance
[12] Wikipedia, “Forward market”,  http://en.wikipedia.org/wiki/Forward_market
[13] Wikipedia, “”,
[14] Wikipedia, “Forward Contract”,  http://en.wikipedia.org/wiki/Forward_contract
[15] Wikipedia, “Futures Contract”,  http://en.wikipedia.org/wiki/Futures_contract
[17] If the collateral drops below minimum level of collateral, the stock exchange makes call margin to the customer to put additional collateral

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